Chancery Decision Doubles Down on Due Diligence

In Edwards v. GigaAcquistions2, LLC (July 25, 2025), the Delaware Court of Chancery dismissed a case, at the pleading stage, in which former members of Cloudbreak Health, LLC, a high-performing health care company, claimed that Cloudbreak was fraudulently induced to join in a de-SPAC combination with a group of financially distressed health care companies (the “Portfolio Companies”). The combined company went bankrupt post-closing. Cloudbreak had received oral assurances and management presentations indicating that the Portfolio Companies were financially sound and positioned for success. A few years after the closing, it came to light that the information about the Portfolio Companies’ financial wellbeing, that had been provided by the Portfolio Companies, their financial advisor and the SPAC sponsor, was false. The court dismissed the plaintiffs’ claims on several grounds—most notably, refusing to toll the statute of limitations for fraud, which had lapsed shortly before the suit was filed.

Key Points

• The court stressed that Cloudbreak could have conducted more expansive due diligence. In refusing to toll the statute of limitations for fraud, the court emphasized that Cloudbreak—rather than relying on the oral statements and management presentations provided to it—could have “request[ed] additional information on [the companies’] financial wellbeing.” The court rejected the plaintiffs’ argument that, as the companies were privately held, the information about them was entirely in the defendants’ hands and therefore undiscoverable.
• The court also stressed that the persons providing the due diligence information were acting on behalf of Cloudbreak’s counterparties. The court noted that the persons providing the due diligence information had no duty to Cloudbreak—rather, they were acting on behalf of Cloudbreak’s counterparties on the other side of the negotiating table.
• The decision highlights a fundamental due diligence dilemma. We note that it is usually the case, and particularly in the context of private companies, that due diligence information is provided by persons who are acting on behalf of one’s counterparties (i.e., persons who owe a duty not to you but to parties on the other side of the negotiating table). And even if “additional information” is requested, such persons, if acting fraudulently, may simply provide more false information.
• The decision underscores the importance of a robust due diligence process. While certainty cannot be attained through due diligence, a robust process provides assurance to the extent possible. Due diligence information should be approached with an appropriate level of skepticism; and written representations and warranties in the parties’ agreement should be sought for any information that is particularly important and/or suspect. Notably, Edwards indicates that the court may refuse to toll the statute of limitations for fraud where it perceives that the party who allegedly received false information engaged in a due diligence process that, in the court’s view, was limited.

Background. In 2015, Cloudbreak was cofounded by the plaintiffs and others. It performed well from its inception and grew rapidly.

In March 2019, GigCapital2, Inc. was incorporated by several of the defendants as a special purpose acquisition corporation (the “SPAC”). GigAcquistions2, LLC was the SPAC’s sponsor (the “Sponsor”). Defendant Dr. Avi Katz was the Sponsor’s managing member and its CEO-President-Chair-Secretary, as well as a director of the SPAC. In June 2019, the SPAC completed its initial public offering.

In November 2019, defendant Dr. Chirinjeev Kathuria cofounded Uphealth Holdings, Inc. to hold five of his health care companies (the Portfolio Companies), which were struggling and debt-ridden.

In summer 2020, the Sponsor was seeking a de-SPAC target company. Kathuria, together with Uphealth’s financial advisor, Needham & Company, LLC, proposed to the Sponsor a combination of Uphealth and the Portfolio Companies with the SPAC. Kathuria and Katz then approached Cloudbreak to convince it to join the de-SPAC combination. Because Cloudbreak was unwilling to work with Kathuria, Katz took the lead in negotiations to assure Cloudbreak of the deal’s merit. Katz allegedly assured Cloudbreak repeatedly that Uphealth and each of the Portfolio Companies were in good financial condition and positioned for success. In June and October 2020, Katz provided Cloudbreak with management presentations on Uphealth and the Portfolio Companies (the “Management Presentations”), including financial statements prepared by Needham, and assured Cloudbreak that he had independently diligenced the financial information and it could be trusted.

On June 2, 2021, the Cloudbreak members approved the de-SPAC combination. On June 9, 2021, the Portfolio Companies were merged into Uphealth, and Uphealth and Cloudbreak were combined with the SPAC. After the de-SPAC closed, the combined company went bankrupt. In 2023, Cloudbreak, in the course of separate litigation with Needham, discovered information that indicated that the Management Presentations may have been false with respect to the financial condition of Uphealth and the Portfolio Companies. On June 3, 2024, the plaintiffs brought suit against the SPAC, the Sponsor, Katz, Kathuria, Uphealth, Needham, and others, claiming, among other things, that the defendants had fraudulently induced Cloudbreak to participate in the de-SPAC. Vice Chancellor Lori W. Will, after briefing and oral argument, granted the defendants’ motion to dismiss the case.

Discussion

Cloudbreak discovered information that, allegedly, indicated that the oral assurances and Management Presentations provided to it had been fraudulent. During the course of unrelated litigation between Cloudbreak and Needham, confidential and proprietary documents were produced in discovery that indicated that the information that had been provided to Cloudbreak about Uphealth’s and the Portfolio Companies’ financial condition had been fraudulent. These documents included “internal chats between Needham junior analysts” in which they expressed that “the only shot to sell the Portfolio Companies was to get lucky with a SPAC,” and “alternative management presentations” that Needham had prepared that were not shared with Cloudbreak.

While the June Management Presentation provided to Cloudbreak showed that Uphealth was comprised of four portfolio companies, an alternative presentation showed revenues for seven companies, not four. The June Management Presentation allegedly showed inflated revenues for two of the companies by including “hidden” revenues of other companies. While the October Management Presentation showed that one of the Portfolio Companies, Glocal, had signed a contract worth $138 million, an alternative presentation showed that the contract was worth at most $60 million. While the October Management Presentation showed that Glocal had served 2,000 patients per day, an alternative presentation showed just half that number. And there was no disclosure that Kathuria was a partner in Glocal; nor that Glocal was insolvent, had defaulted on several loans, and had not paid certain taxes; nor that Glocal’s auditor had resigned the year before. Both Management Presentations showed, allegedly falsely, that Glocal had signed contracts with several countries. And, while both Management Presentations showed 86% growth for another Portfolio Company, alternative presentations showed just 69% growth.

The court held that the fraud claims accrued at the time the allegedly false statements were made, not at closing. The plaintiffs asserted that their claims were made within the statute of limitations, as the lawsuit was filed on June 3, 2024, which was within three years of the de-SPAC’s closing on June 9, 2021. The plaintiffs argued that a claim for fraudulent inducement to enter into a transaction could not be ripe (i.e., there could be no injury) until the induced transaction occurred (i.e., closed). The court acknowledged that fraud claims may accrue at closing where the purported fraud was contained within the parties’ transaction agreement itself, but in this case, the court stressed, the alleged fraud occurred outside the parties’ Business Combination Agreement. “A fraud claim accrues, and the statute of limitations begins to run, at the moment of the wrongful act and not when the effects of the act are felt,” the court wrote. The alleged wrongful acts here were “fraudulent or misleading statements predating the Cloudbreak [Business Combination Agreement]’s execution in November 2020.” Therefore, the claims “accrued no later than November 2020”—which meant that the lawsuit was filed after the three-year statute of limitations had run, and thus the claims were time-barred unless the statute could be tolled.

The court held that the statute of limitations could not be tolled. The plaintiffs asserted that, even if more than three years had passed before they filed suit, they were not on inquiry notice until 2023 when the “trove of confidential and proprietary information” about Uphealth’s and the Portfolio Companies’ financial condition came to light in the unrelated litigation between Cloudbreak and Needham. The court, after an extensive review of the doctrines under which tolling of the statute of limitations is permissible, concluded that the plaintiffs’ arguments were most aligned with the doctrine of “inherent unknowability.” Under that doctrine, until there is “inquiry notice,” the statute can be tolled if “the facts underlying the claim were so hidden that a reasonable plaintiff could not timely discover them.” The court, holding that the doctrine did not permit tolling in this case, stressed the following:

• No duty to Cloudbreak. “[T]he plaintiffs and Cloudbreak were owed no duty by the [defendants]—their counterparties in the negotiations. Katz was acting on behalf of [the SPAC’s sponsor], and Kathuria and Needham were acting on behalf of Uphealth.”
• Further due diligence by Cloudbreak. “Nothing prevented the plaintiffs from doing their own due diligence into the Portfolio Companies and requesting additional information on their financial wellbeing. Their failure to do so does not make any injury suffered inherently unknowable.”
• Needham’s disclaimers. The Management Presentations included disclaimers stating that Needham was not responsible for the veracity of the information, and that the information had been prepared by Uphealth’s management and “involved significant elements of subjective judgment and analysis that may or may not be correct.” These disclaimers, the court stated, “also would have put the plaintiffs on inquiry notice that Needham had not ‘diligenced’ the information provided,” that there might be “inaccuracies” in the presentations, and that “they [(Cloudbreak and the plaintiffs)] should conduct their own analysis.”

The court distinguished BTIG v. Palantir. In BTIG v. Palantir (2020), the Delaware Superior Court held that the statute of limitations for fraud was tolled until documents which had “previously [been] secret” became public and revealed an alleged scheme to undercut Palantir’s brokered deal of Palantir stock. The Superior Court observed that there were agreements requiring BTIG to disclose to Palantir any brokered deal of Palantir stock. The Superior Court reasoned that such a situation “seemingly involve[d] good faith and fair dealing”—that is, “[i]t would be strange to allow Palantir to use this information with impunity, and negotiate side deals that cut out the disclosing parties.” Vice Chancellor Will noted in Edwards: “This reasoning [in BTIG] was based on a duty Palantir purportedly owed to BTIG”— by contrast, the Vice Chancellor stressed, the defendants in Edwards owed no duty to Cloudbreak.

The court relied on Krahmer v. Christie’s. Vice Chancellor Will noted Krahmer v. Christie’s (2006), where the Court of Chancery addressed whether the inherently unknowable injuries rule applied where an auction house sold an allegedly fake work of art to a person who had no particular reason to question its authenticity until after the statute of limitations had expired. The court held in favor of the auction house, reasoning that i the auction house’s interests were aligned with the interests of the consignors of artwork, not the interests of the purchasers of artwork, and that this purchaser could have discovered the truth about the artwork’s authenticity by obtaining an appraisal from its own art expert. Vice Chancellor Will stated that Edwards was “more like Krahmer than BTIG.” The Vice Chancellor wrote: “Like the purchasers in Krahmer who were owed no duty by Christie’s, the plaintiffs and Cloudbreak were owed no duty [by the defendants here]” and could have done their own further due diligence.

Practice Points

• Due diligence. In the context of both public and private company acquisitions, under almost all circumstances, a buyer should seek to ensure that it engages in a robust due diligence process. A buyer should understand that a due diligence process, even if robust, cannot provide certainty. For any information that is especially important, uncertain, suspect, or easy to manipulate, a buyer should consider whether it can obtain protection by negotiating for specific representations and warranties in the parties’ written agreement.

• Not a passive process. Information provided in due diligence should not be blindly accepted as accurate; follow-up questions should be asked; backup data should be requested; utilizing one’s own advisors and experts to doublecheck certain information should be considered; and a record of the information sought (and obtained) should be maintained. Where the company is private, there is a heightened challenge to verify information that is provided, particularly if the seller is not well-known to the buyer and/or does not have a significant reputation or track record. Depending on the circumstances, a buyer may wih to consider talking to the target’s outside acctnts, existing or former clients or customers, and existing or former employees, and consider visiting critical operational facilities, to try to confirm information, at least where there are red (or yellow) flags. Some information that is critical and should be readily available should be double-checked—such as whether the company’s accountant was only recently engaged (which, if so, should be considered a red, or at least a yellow, flag).

• Who is providing the information. A party should pay attention to whether information is being provided by a person who is acting on behalf of a counterparty that owes no duty to the party and/or has disclaimed responsibility for the veracity of the information. A party should consider utilizing its own advisors and experts who may owe a duty to the party.
• Financial advisors should consider including disclaimers—stating that information they are providing has been prepared, or based on data provided by, company management and includes subjective judgments that may or may not be correct.

• Post-closing diligence review. We note that, where in the due diligence process a company was portrayed as financially sound, and post-closing the company is failing, a post-closing diligence review should be considered so that possible fraud (or breach of representations and warranties) can be established before expiration of the statute of limitations (or any agreed indemnification period). A post-closing checklist should be maintained to serve as a reminder of important dates and deadlines under law or set forth in the parties’ agreement.